China threatens sanctions against U.S. companies

China’s recent threat to impose sanctions on U.S. defence companies that sell arms to Taiwan should come as no surprise to American officials or corporate executives: Washington has been issuing sanctions of these sorts for years. It was only a matter of time before U.S. competitors started copying its tactics.

Regardless of whether China follows through on its threat, Washington needs to be ready for a new normal in which the United States must defend against sanctions as well as impose them.

China is taking a page from the sanctions playbook Washington developed against Iran. Between 2010 and 2015, the United States effectively gave companies a choice: If they did prohibited business with Iran, like buying oil, they would get cut off from doing any business in the United States. Forced to choose between access to the world’s most important financial system and an Iranian market less than 1/30th the size, most companies stuck with Washington and avoided Tehran.

China’s threat mirrors this approach – trying to force U.S. companies to choose between defence sales to Taiwan and access to a Chinese economy that is nearly 20 times larger. While U.S. companies do not currently sell military equipment to China, many U.S. defence contractors do sell civilian passenger aircraft, aviation parts and other civilian equipment in China and could find their ability to continue those sales cut off by Beijing.

For Beijing, this is a change in official position. China has long argued that only sanctions imposed by the United Nations Security Council are legitimate. Yet, Beijing has not strictly adhered to this policy. In 2012, for example, it unilaterally limited imports of fruit and vegetables from the Philippines in retaliation for a dispute over claims in the South China Sea.

But China’s public threat over Taiwan marks a major escalation in its apparent willingness to deploy sanctions of its own against U.S. companies engaging in business, particularly business that is expressly authorised by the Obama administration and publicly supported by many in Congress.

Chinese policymakers understand that their growing economic and financial clout makes sanctions threats more credible. China is a critical market for U.S. products from cars to computer chips, and companies like Wal-Mart, Apple, MasterCard and Starbucks are among the leading American firms that generate at least 10 percent of their business in China, according to data compiled last year by Factset Research.

Other countries, like Russia, have also begun to assess areas where they have economic leverage they can use against Washington and its allies.

There are several practical steps that the United States should take to respond to China’s threat or to prepare for when other countries threaten sanctions.

First, U.S. officials need to begin systematically planning for sanctions defence. While Washington has strong analytic mechanisms to develop new sanctions against foreign targets, it does little to analyse U.S. sanctions vulnerabilities. This needs to change. Fast. The Treasury Department should, for a start, set up a defensive sanctions planning committee to research and report on U.S. sanctions vulnerabilities.

Second, Washington needs to make clear to Beijing that the U.S. government will support American companies threatened by sanctions. Senior U.S. officials should emphasise that Washington views China’s threat as unacceptable and that the United States will encourage American companies to participate in the deal with Taiwan despite the threat.

If China follows through and imposes sanctions, Washington needs to look at mechanisms to protest China’s action and to seek economic recourse for affected U.S. companies.

Third, companies need to do more to identify sanctions risks and to harden defences against potential vulnerabilities. U.S. companies already engage in sophisticated analyses to ensure that far-flung events like earthquakes or other natural disasters do not disrupt global business. Companies should apply similar risk assessments and mitigation strategies toward potential sanctions by foreign governments.

Fourth, the United States needs to invest far more energy and diplomatic capital to build global standards defining when sanctions should and should not be used. There are currently few such standards – even among close U.S. allies like the European Union.

If Washington does not step up to shape such standards, China and other governments will likely try to do so. Developing standards about the use of sanctions will not, by itself, prevent China or other governments from misusing them. But just as global standards help constrain the misuse of military force by foreign governments, standards about the use of economic force will help Washington fight back against misuse.

Sanctions and other economic tools will likely play a central role in U.S. foreign policy in the years ahead. China’s threat brings home the need to recognise that the United States has its own vulnerabilities, and Washington should take steps to address them.

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